Double-Dip and Triple-Dip Bonus Depreciation

[Stephen Nelson]

I think this is my first actual post. (Normally I just try to answer questions.) But a bonus depreciation topic we’re discussing on a tax accountants subreddit includes a strategy some real estate investors may be able to use: double-dip and triple-dip bonus depreciation deductions.

In a nutshell, here’s the logic using (to make the math easy) the example of a $1,000,000 investment.

If you bought a $1,000,000 property after January 19, 2025, you maybe get a $300,000 bonus depreciation deduction on your 2025 tax return. (The actual percentage varies and depends on the cost segregation study results.)

But here’s the weird thing lots of people don’t know: If you use a Section 1031 like-kind exchange to trade that $1,000,000 property for another $1,000,000 property in 2026? You get another bonus depreciation deduction. (That’s the double-dip.)

If you do this again in 2027? You get another bonus depreciation deduction. (That’s the triple-dip.)

An important detail: The bonus depreciation formula looks at the basis in the acquired property. You don’t get $300,000 each year if you buy a string of $1,000,000 properties with 30% personal property allocations. The deduction number shrinks. If bonus depreciation equals $300,000 in year 1, bonus depreciation would not be more than $210,000 in year two. And less not more than $147,000 in year three.

Three important details: Taxpayer needs to be able to use the deduction by, for example, qualifying as REP or by investing in STRs. Local law needs to consider the entire property “real estate” because tax law limits Section 1031 exchanges to real estate. Also, the reg cite for the bonus deprecation eligibility is Reg. §1.168(k)-1(f)(5)(iii)(A). (Tax guys or your tax guy may want this.)

A final caveat: Transaction costs may make this impractical or quickly impractical. (Someone cannot economically do this “double-dipping” ten or twenty times in a row.)

[Stephen Nelson]

Quote from @Natalie Kolodij:

My understanding is following a LKE only the excess basis in the replacement asset qualifies for Bonus depreciation; not any carry over basis. (Regardless of if the simplified reporting election is made or not)

Is that being taken into account for the example / suggestion here? 

So the way I think you're suggesting this works is sort of the simple and maybe even default way to do this.

But Regs §1.168(k)-1(f)(5)(vi) "Example 3" and then Reg. §1.168(k)-2(g)(5)(v) "Example 4" describe how bonus depreciation can work with a like-kind exchange. These two examples are the same example, BTW. But mechanically work the way described above.

FYI there's a slightly off topic reddit thread here, Short Story about Tax Strategy, ChatGPT, and User Prompts : r/taxpros , that talks about how ChatGPT struggles with clearly seeing how the double-dip and triple-dip bonus depreciation deduction works. Lots of people initially confused. Also ChatGPT confused until your point to the examples in your prompt.